Owner of Famed Bagel Biz Hit With Tax Charges

Shortchanging unemployment system affects other businesses, official says

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H&H Bagels owner Helmer Toro is accused of pocketing more than $369,000 in income and other taxes withheld from employees' paychecks and set up shell companies to game the unemployment insurance tax system out of another $33,000.

The owner of a storied Manhattan bagel business shortchanged the state out of a lot of dough by cheating on taxes, prosecutors said Wednesday.

Officials said it was the first criminal case in the state -- and maybe the country -- arising from new laws against manipulating a business ownership structure to lower unemployment taxes.

Toro was released from custody after pleading not guilty to charges including grand larceny. His lawyer didn't immediately return a telephone call.

The 37-year-old business bills itself as the world's biggest bagel manufacturer, dispatching millions of bagels around the world each year from a Manhattan bakery. H&H has been featured in TV's `Seinfeld'' and the 1998 movie "You've Got Mail,'' not to mention countless food guides and best-of lists.

The business has a history of tax trouble. State officials shut down its West Side facilities for a few hours in May, saying H&H owed more than $25,000 in sales and other taxes. The bagel emporium hastily paid and reopened; a representative called the matter a misunderstanding.

In the new case, prosecutors say Toro deducted $369,000 in taxes from his roughly 100 employees' paychecks but held onto the money instead of paying it to the state for them, prosecutors said.

Meanwhile, he transferred most of the employees to a series of shell companies masquerading as new businesses, prosecutors said. New firms can get lower unemployment insurance tax rates than older ones because the rates reflect how many employees a company has laid off over time.

That maneuver saved Toro money, but it ultimately costs other companies that have to pick up the slack to finance unemployment benefits, officials said.

"Who pays the difference? It's everyone else who's squeezed,'' said state Department of Taxation and Finance Deputy Commissioner William Comiskey.

A 2003 survey by the federal General Accounting Office found that such tactics -- known as unemployment tax "dumping'' -- cost more than $120 million in just 14 states over three years. A federal law the next year empowered states to crack down on the practice.

Since New York's law took effect in 2006, state officials have pinpointed $20 million worth of unemployment insurance dumping by 354 companies. But the H&H case is New York's first criminal prosecution on the issue, state Labor Commissioner M. Patricia Smith said.

State officials said they believed it also was the first nationwide. The federal Department of Labor couldn't immediately say.

Toro, 59, could face up to 15 years in prison and hundreds of thousands of dollars in fines if convicted.